2022 was not a fun year for FAANG investors. Every single one of the major technology giants saw their share prices fall by more than 25% last year, ending a decade-plus bull run that made these companies some of the most valuable in the world. Falling share prices for the technology giants brought down a lot of other stocks last year as well, some by as much as 80%. But not all stocks fell in 2022. Enter Lockheed Martin (LMT 1.71%), one of the leading U.S. defense contractors, which saw its share price soar by over 40% during last year's bear market.
Lockheed Martin can be a fantastic defensive stock (pun intended) to balance out your high-growth portfolio. Here's why it held up so well in 2022 while technology, internet, and growth stocks were sputtering.
LMT Total Return Level data by YCharts
Q1 earnings
As one of the largest defense and aerospace contractors for the U.S. government, Lockheed Martin has long-term contracts with the Department of Defense and its allies. It focuses on selling fighter jets, missiles, helicopters, and space systems to its government customers. With long-term contracts that can extend for well over a decade if you include maintenance and servicing, Lockheed has an extremely predictable business that has steadily grown along with the U.S. defense budget.
This was exemplified again in its Q1 2023 results, which were released this month. Revenue in the quarter was $15.1 billion, up slightly from $14.9 billion a year prior. Earnings per share (EPS) was up to $6.61 compared to $6.44 in 2022, with the business generating healthy cash flow that management could return to shareholders.
Lockheed may not be the sexiest stock out there, but its durable earnings growth makes it much less susceptible to major stock drawdowns, which is a key reason why it produced positive returns in 2022. Of course, 40% growth is an abnormally strong year, which happened due to the burst of investor excitement in defense stocks in reaction to the Russian invasion of Ukraine. Over the long term, investors should expect Lockheed to return high-single-digit or low-double-digit compound annual returns for their portfolios through single-digit revenue growth and returning capital to shareholders through dividends and share repurchases.
Long-term competitive advantages
Defense contractors have had relationships with the U.S. government for decades, building up technological expertise and switching costs that make a company like Lockheed Martin incredibly costly to switch contractors for programs like advanced fighter jets. Even though there have been some rumblings that The Pentagon intends to spread contract awards among a wider array of contractors, Lockheed has a clear advantage in high-priority programs such as hypersonics, aerospace, and the F-35 fighter.
At the end of Q1, Lockheed Martin had a total backlog of $145 billion, which is over two years of revenue according to its 2023 guidance outlook. This number is slightly down from $149 billion a year ago, however, I don't think investors should be too concerned about this. Q1 2022 was a period of intense fighting and disruption with the Russian invasion of Ukraine, which inspired many governments to make orders for new defense equipment and systems.
Over the long term, Lockheed Martin has increased its backlog along with its overall revenue as it secures more long-term contracts with government agencies. For example, in 2015 its backlog was just under $100 billion. This industry dynamic makes Lockheed's business extremely predictable year after year.
The key is returning capital to shareholders
At a massive size and with tight governmental regulation, Lockheed Martin is not going to blow your socks off with revenue growth. But it can still perform well for shareholders by growing its capital returns program through dividend payouts and share buybacks.
LMT Shares Outstanding data by YCharts
Over the last 10 years, Lockheed Martin has grown its dividend per share by 156% while reducing its shares outstanding by around 20% through share repurchases. It currently has a dividend yield of around 2.4% and plans to repurchase $4 billion worth of stock in 2023, or around 3% of its shares outstanding based on its current market cap of $126 billion.
With a below market average price-to-earnings ratio of 18, steady capital returns, and a competitively advantaged business, I think Lockheed Martin is still set up to perform well for shareholders over the next decade and beyond. Don't think you missed the boat because the stock soared 40% in 2022.
